One way to check that an action has a point is to ask how success is measured. Currently, the success of SRI is measured in terms of assets under management, which is to say the dollar value of investments held by funds that describe themselves as “socially responsible.” While that clearly measures marketing and market success, does it have any relation to the intention of those customers in signing up for SRI funds?
Depends on the investors’ intentions
If the intention is a clear conscience, and people haven’t taken their money out of a fund, then that fact might be the only way to measure success, since only those individuals know their consciences. And for values-agnostic investors, return on investment and growth in assets under management would of course be valid ways to measure success.
[Though keep in mind that portfolio managers have a bias toward investing. Managers don’t get paid to sit on cash (i.e. admit to your clients that you are out of ideas). As a result, you could imagine this scenario: Microfinance is hot, and investors meet capital demands for the existing microfinance market where they have confidence in the loans. But there’s still demand among investors to put money into microfinance! So what do they do? Lower standards? Encourage more micro entrepreneurs to borrow more? Optimistically ignore deterioration in existing portfolios? Probably all of the above. Bubbles can happen in SRI as well as anywhere else. And the alternative for managers in themed funds is to invest elsewhere as long as it doesn’t work against core fund values, so a “green building” fund can invest in cloud computing (because it’s low carbon). So you’d also want to know that your thematic fund is investing according to your expectations.]
If the goal is to make the world a better place
Active engagement resembles traditional activism: portfolio managers make a request of a company, and it either complies or doesn’t. Regulators such as the SEC in the US limit what investors can formally ask management to do (e.g. by votes at shareholder meetings, and at any rate shareholder votes in the US aren’t legally binding on management), but there are more flexible and informal routes to getting management’s ear for sizeable investors or coalitions of investors such as CERES. Companies such as F&C Asset Management and others who sign onto the UN Principles for Responsible Investment are increasingly reporting on their engagement, both efforts and results.
But the effect of the best-in-class approach to SRI — i.e. the “carrot” to engagement’s “stick” — is trickier to evaluate. This approach is usually scatter shot: without a focus on a particular issue or small set of issues, it’s hard to determine what behavior companies would be expected to change. Without setting expectations, there’s nothing to measure companies against over time. And what’s more, given the nature of the best-in-class approach, I would expect the greater changes to be not within companies included in SRI portfolios but rather within the greater universe of companies who would try to improve in order to gain entry into SRI portfolios.
Transparency as a medium term goal
Measuring increased transparency (i.e. reporting) is one of the simpler and more common ways to track how corporate culture in general is changing as a result of demand from investors who (for whatever reason) are interested in environmental and social performance, though it can be hard to distinguish communication efforts from actual change. Yet increased transparency can represent actual progress and is a prerequisite for other progress, though transparency has had mixed results in achieving its stated goals. The US Toxic Release Inventory has been successful in reducing toxic emissions; but when CEO compensation became more transparent in the US, it also went up — as CEOs were better able to compare their packages against their peers. And, as discussed in another post, the meaning of disclosed numbers can have multiple causes — just as an NGO that has lower administrative costs as a percentage of expenditures may be more efficient or may be underpaying its own staff, and a company locating its operations in low-income areas may be providing a social service and/or offering predatory services or polluting communities.
The SRI industry is aware of its measurement shortcoming, and there is an ongoing discussion seeking to provide more clarity on what SRI accomplishes. But until that clarity comes, its absence will weigh down growth in current (financial) measures of success.
Impact investors have different goals and increased leverage
Impact investors are further along in terms of measuring results. These investors focus on particular projects and social goals as part of the investment process, such as the number of jobs created (or preserved), amount of tax revenue, etc. [Though some metrics are still proxies for the intended benefit, such as measuring “square footage of new grocery space” rather than the actual consumption of healthier food by residents in the Bronx.] But these investments tend to be smaller, more project-focused and local — and require more effort to evaluate. They don’t offer the scale to displace substantial funds currently invested in large corporations, and the focus on local impacts such as jobs could lose sight of larger issues such as resource use. Yet such efforts as IRIS and GIIRS, with leadership by the Rockefeller Philanthropy Advisors and B Lab, are worth following — it’s quite an exciting space right now.[See also “social impact bonds” for related innovation.] Such investors, who are more along the lines of private equity and venture capital than public equity investment, have more leverage to start the conversation from a point of “you’ll give me what I want to know” rather than “I’ll have to figure out how to use what you and your competitors deign to give me.”
So what’s an investor to do?
First, I do think that having an SRI fund is better than the alternative, if the alternative is investing in large cap publicly traded corporations without an SRI overlay, particularly if the fund actively and successfully engages corporate management. But potential investors need to be aware of what they are buying when they invest in SRI funds.
SRI holds a huge amount of potential, and I am hopeful that by pointing out its shortcomings clearly and publicly, we will increase the speed with which they are resolved.
Letting SRI play to its strengths
One other way to better profit from SRI is to maintain realistic expectations of its power, and not pursue it singlemindedly when other strategies (e.g. litigation, regulation, unions, consumer activism) would be more appropriate. Particularly as regards company engagement, triage is requisite. Perhaps SRI is a fine way to convince McDonald’s to change the behavior of its suppliers when the USDA seems incapable or unwilling, but we are fortunate that the US EPA’s Toxic Release Inventory was created by legislation rather than voluntary commitments by individual companies. And the consumer campaign against Nike worked far faster than an SRI campaign would have done. But investors have seen their shares of success as well — e.g. in confronting apartheid in South Africa or in bringing about a settlement for thalidomide victims in the UK. And this strategy is by no means played out.
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